Chapter VII: Japan and Foreign Capital1

Japan, far from becoming antagonistic to the occidental nations, as it was prognosticated by some of the Continental journalists, has given another proof of her readiness for the identification of her economic interests with those of the occidental people.

Hitherto in Japan there has been no law which regulated the mortgaging of a railway, or a mining enterprise, or a factory, together with its working system, as a corporation, that is to say, mortgaging the whole system of a railway, a mining enterprise, or a factory as an economic whole, comprising not only each particular material object but also all the organic components of its working system as the subject matter of mortgage. A radical change has now been effected in the matter.

According to the Japanese laws there are two methods for a commercial company in contracting a debt. One is the ordinary borrowing of money from a creditor, and the other is borrowing in the shape of debentures by public subscription. Now in ordinary borrowing of money the liability may be secured by mortgage, but the debentures could not be secured by mortgage, although of course the liability extends to the whole property of the company.

The first effect of the new change is the provision which enables companies to guarantee debentures by mortgage, and the second effect is the provisions which relate to the creations of economic corporations of railways, mining works, or factories for the special purpose of instituting mortgages of their economic entity.

To make the matter easier to comprehend, I will first explain it with regard to railways.

The permission of the Government originally given to the company is in the nature of a licence or concession which is to be viewed more in the light of a personal matter of the original company, and therefore it could not be a subject matter of a public auction, and therefore according to the old law, if a railway company becomes bankrupt, all the material property, either movable or immovable, would go to new hands, but the licence itself cannot but become extinct with the dissolution of the original company, viz. the original grantee.

This being so, if a railway company fails to fulfil its liability for debenture and goes into bankruptcy, the ultimate result would be that the railway system would be broken up, and the creditors would get their satisfaction only from the sale of each piece of the material property sold by public auction. Even in the case of ordinary debt, whereby all the material property can be mortgaged, the result would be practically the same.

All these inconveniences have now been removed by a series of new laws passed by the last session of the Imperial diet and promulgated on March 13, 1905, by the Imperial Government. The articles of the laws are very numerous and minute, so that it would be unnecessary to dwell upon them here in detail, but the more important parts may be summarised as follows:

_(a)_ The economic entity of a railway company may be constituted a special economic corporation for the purpose of mortgage.[2]

_(b)_ In default of payment of the mortgage liability, the whole, _i.e._ the corporation, may be subjected to auction. This provides the means for transferring, together with the material properties, the original permission of the Government, namely, the licence, to the purchaser, viz. a new company.

_(c)_ A company, which in reality may be taken as a syndicate, may be formed for advancing money by means of debentures. Such company may acquire legal recognition and may represent the creditors of debentures. It forms a particular kind of commercial company, and is called 'trust company.'

_(d)_ At the option of the creditors, means of compulsory control of the railway in the interest of creditors are also provided for in the laws.

_(e)_ Special provisions are made to meet the cases where the syndicate and investors are of foreign nationality: namely, the means of recognising foreign syndicates by the Japanese Government, and also the means of affording convenience for foreign investors.

_(f)_ Further provisions are made for facilitating the registration of constituting the said corporation, and the registration of the mortgage thereof, for these affairs, as far as railways are concerned, are now entrusted, by the new laws, to the Minister of Communications, to whose control the railways belong, and not to the local courts of law, as is the case with all other kinds of mortgages.

This change of our laws gives very great facility to foreign investors who may be willing to lend money on railway securities.

The case of mining enterprises were similar because they are also based on licences. For them also much the same changes have been effected by the new laws, so that their economic entity may now be mortgaged in the interests of either an ordinary creditor or investors in debentures.

The cases of ordinary factories differ in origin from those of the railways or mines, they not being based on a concession or licence like railway or mining enterprises. But for them also the new laws have made provisions for the means of constituting corporations for the purpose of guaranteeing debenture by mortgage. Provisions have also been made for guaranteeing debenture by mortgaging ships, any definite property either immovable or movable, or any legal claims which are secured by written instruments.

[1] The _Outlook_.

[2] The law also permits the companies constituting such a corporation of a part of the whole for a similar object. But as its general purport does not materially differ, I omit its account in order to avoid confusion.--_The Author_.